A trust is a legal arrangement under which you (the “grantor”) transfer control over property to a person or institution (the “trustee”) for the benefit of a third person (the “beneficiary”). A living trust is a great way to maintain control over your assets while you are alive. You can also name a successor trustee to manage your assets should you become unable to do so, whether because of disability or upon your death.
There are two basic types of trusts. Trusts can be either revocable or irrevocable. With certain exceptions, the terms of an irrevocable trust cannot be modified, amended or terminated without the permission of the grantor’s named beneficiary. Having transferred all ownership of assets into the trust, the grantor has legally removed their rights of ownership to the assets and the trust.
By contrast, a revocable trust allows the grantors to modify the trust. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the trust beneficiaries. Unlike an irrevocable trust, a revocable trust does not provide protection from creditors.
Benefits of Irrevocable Trusts
Many people set up trusts to avoid the probate process, which can be lengthy and expensive. In addition, unlike a will, a trust can also plan for what happens to a person’s estate if they become incapacitated. Establishing an irrevocable trust essentially removes the trust’s assets from the grantor’s taxable estate and relieves the grantor of the tax liability on the income the assets generate.
Another important benefit of an irrevocable trust is that it can protect your property from creditors because ownership of the assets remains with the trustee, not the beneficiary. As such, it is safe from legal judgments and creditors, as the trust will not be named as a party to any lawsuit. This can be particularly useful for people who work in professions that may make them vulnerable to lawsuits. Trust assets are also shielded from recovery for long-term care expenses.
Types of Irrevocable Trusts
Irrevocable trusts come in two forms: living trusts and testamentary trusts. A living trust is established and funded by an individual during their lifetime. Testamentary trusts, which are irrevocable by design, are established after the death of the grantor. They are funded from the deceased's estate according to the terms of their will. The only way to make changes to a testamentary trust (or to cancel it) is to alter the will of the trust's creator before they die.
Irrevocable trusts can be established for specific purposes, including:
- Special needs trusts (also known as supplemental needs trusts) protect government benefits for disabled beneficiaries
- Spendthrift trusts restrict beneficiaries’ access to trust property
- Charitable trusts benefit particular charities or the public in general
- Life insurance trusts in which the trust buys the life insurance and pays the premiums
- Lifetime giving trusts such as grantor-retained annuity trusts, spousal lifetime access trusts, and qualified personal residence trusts
- Medicaid trusts, in which grantors “spend down” their assets to meet income requirements to qualify for benefits (such as nursing home care or assisted living from Medicaid)
How to Make Changes to an Irrevocable Trust
Generally, the permission of all beneficiaries is needed to make a change to an irrevocable trust. However, many states, including Ohio, have what is known as a decanting law, which allows changes to a trust by creating a new trust with updated terms and transferring (“decanting”) the old trust assets into the new one. In such a case, all beneficiaries must be notified.
Differences Between Trusts and Wills
As you contemplate your estate planning options, it is important to understand the differences between trusts and wills. A will goes into effect only after you die while a trust takes effect as soon as you create it. That is, a trust can be used to begin distributing property before your death, as well as after you die. Another key difference is that a will generally passes through probate, whereas a trust does not go through probate. A trust remains private, while a will becomes part of the public record.
The grantor of a trust can decide when and how much the beneficiary receives after his/her death. This is important for certain grantors who may not wish to bestow assets on a beneficiary until he or she reaches a certain age. A trust can administer assets for minor beneficiaries without court intervention, while a will cannot.
How We Can Help
If you need assistance establishing a trust or with other personal planning matters, we welcome you to contact us. Based in Cincinnati, we serve clients throughout Ohio and are dedicated to helping you plan for your family’s future.